When it comes to investing in mutual funds, small-cap funds can offer investors the opportunity for significant growth potential. These funds typically invest in companies with smaller market capitalizations, which can be more volatile but also have the potential for higher returns. If you’re considering adding small-cap mutual funds to your investment portfolio in 2024, here are some of the best options to consider:
Best Small Cap Mutual Funds To Invest In 2024
Understanding Small Cap Mutual Funds
Before delving into specific recommendations, let’s elucidate the concept of small-cap mutual funds. Small-cap funds typically invest in companies with relatively small market capitalizations, often referred to as small-cap stocks. These companies are characterized by their potential for rapid growth, agility, and ability to outperform larger counterparts, especially during periods of economic expansion.
Factors to Consider Before Investing in Small-Cap Mutual Funds
Here are some key factors to evaluate before investing in small-cap mutual funds:
Risk Tolerance
Small-cap stocks are inherently more volatile compared to their large-cap counterparts. These companies may lack the stability and resources of larger firms, making them susceptible to market fluctuations. Assess your risk tolerance and investment horizon to determine if you’re comfortable with the higher volatility associated with small-cap investments.
Investment Goals
Clearly define your investment goals and objectives before allocating funds to small-cap mutual funds. Are you seeking capital appreciation over the long term, or are you looking for more immediate returns? Understanding your investment objectives will help align your portfolio with your financial goals.
Market Conditions
Consider the prevailing market conditions and economic outlook before investing in small-cap mutual funds. Small-cap stocks tend to perform well during periods of economic expansion but may underperform during economic downturns. Evaluate factors such as GDP growth, interest rates, and industry trends to gauge the potential performance of small-cap funds.
Fund Management
The expertise and track record of the fund management team are critical factors to consider. Research the credentials and experience of the fund managers, their investment philosophy, and their approach to managing small-cap investments. A skilled and experienced management team can significantly influence the performance of the fund.
Performance History
Analyze the historical performance of the small-cap mutual fund, considering its returns over different periods and market cycles. Look for consistent performance and the ability to outperform relevant benchmarks. Keep in mind that past performance is not indicative of future results but can provide valuable insights into the fund’s track record.
Expense Ratio
Pay attention to the expense ratio of the small-cap mutual fund, which represents the annual fees charged by the fund for management and administration. Lower expense ratios translate into higher returns for investors over the long term, so opt for funds with competitive expense ratios that align with your investment objectives.
Portfolio Composition
Examine the composition of the fund’s portfolio, including sector allocation, individual holdings, and diversification strategies. A well-diversified portfolio can help mitigate risk and enhance returns by spreading investments across different sectors and companies.
Tax Implications
Understand the tax implications associated with investing in small-cap mutual funds, particularly regarding capital gains distributions and tax efficiency. Consult with a tax advisor to assess the potential tax consequences of investing in small-cap funds and optimize your investment strategy accordingly.
Also Read: Top 10 Mutual Funds to Invest in 2024
Risks Involved While Investing in Small Cap Funds
Investing in small-cap mutual funds offers the potential for high returns, but investors need to be aware of the risks involved. Here are some key risks to consider:
- Higher Volatility: Small-cap stocks tend to be more volatile than large-cap stocks. This means that their prices can fluctuate more dramatically in response to market conditions, economic factors, or company-specific news. Higher volatility can lead to greater short-term price swings and increased portfolio risk.
- Liquidity Risk: Small-cap stocks often have lower trading volumes than larger companies, which can make it more difficult to buy or sell shares at desired prices. In times of market stress or economic uncertainty, liquidity in small-cap stocks may dry up even further, potentially leading to wider bid-ask spreads and increased trading costs.
- Greater Sensitivity to Economic Conditions: Small-cap companies are often more sensitive to changes in economic conditions than larger, more established companies. During economic downturns or periods of market turbulence, small-cap stocks may underperform as investors become more risk-averse and favor larger, more stable companies.
- Business Risk: Many small-cap companies are in the early stages of development and may lack the resources, track record, or competitive advantages of larger companies. As a result, small-cap stocks may be more vulnerable to business risks such as product failures, management missteps, or industry disruptions.
- Underperformance Relative to Large-Cap Stocks: While small-cap stocks have the potential to outperform over the long term, they may also underperform during certain market cycles or economic environments. Factors such as rising interest rates, inflationary pressures, or changes in investor sentiment could weigh on small-cap stocks relative to large-cap stocks.
- Sector Concentration Risk: Small-cap mutual funds may be more heavily concentrated in certain sectors or industries, which can increase portfolio risk if those sectors experience challenges or downturns. Investors should be aware of the sector composition of small-cap funds and consider the potential impact on overall portfolio risk.
Who Should Invest in Small Cap Mutual Funds?
Here’s a some for those who should consider investing in small-cap mutual funds:
Growth Oriented Investors
Investors who are seeking above-average growth potential in their investment portfolios may find small-cap mutual funds appealing. Small-cap stocks have historically outperformed large-cap stocks over the long term, making them suitable for investors with a growth-oriented investment strategy.
Long Term Investors
Small-cap mutual funds are ideal for investors with a long-term investment horizon. While small-cap stocks can be more volatile in the short term, they have the potential to deliver significant returns over time. Investors who can withstand short-term fluctuations and remain invested for the long term may benefit from investing in small-cap mutual funds.
Investors Seeking Diversification
Diversification is key to managing risk in any investment portfolio, and small-cap mutual funds can help achieve diversification by providing exposure to smaller companies across various sectors and industries. Investors looking to diversify their portfolios beyond large-cap stocks and other asset classes may consider adding small-cap mutual funds to their investment mix.
Risk Tolerant Investors
Small-cap stocks are generally more volatile than large-cap stocks, which can lead to greater fluctuations in the value of your investment. Investors who have a higher tolerance for risk and are comfortable with the potential ups and downs associated with investing in smaller companies may find small-cap mutual funds suitable for their investment objectives.
Active Investors
Active investors who enjoy researching and selecting individual stocks may find small-cap mutual funds appealing. While investing in individual small-cap stocks requires significant time and effort, investing in small-cap mutual funds allows investors to gain exposure to a diversified portfolio of small-cap stocks managed by professional fund managers.
Investors with Patience
Investing in small-cap mutual funds requires patience and a long-term perspective. Small-cap stocks may experience periods of underperformance or volatility, but investors who remain patient and committed to their investment strategy may be rewarded with strong returns over time.
Those Looking for Potential Outperformance
Historically, small-cap stocks have outperformed large-cap stocks over the long term, albeit with higher volatility. Investors who believe in the growth potential of smaller companies and are willing to accept the associated risks may consider investing in small-cap mutual funds in pursuit of potential outperformance compared to broader market indices.
Also Read: Best ELSS funds To invest In 2024
Advantages of small cup funds
Investing in small-cap funds offers several advantages for investors:
- Potential for High Returns: Small-cap stocks have historically shown the potential for high growth rates. These companies are often in their early stages of development, which means they have more room to grow compared to larger, more established companies.
- Portfolio Diversification: Adding small-cap funds to your investment portfolio can help diversify your holdings. Small-cap stocks often have low correlations with large-cap stocks and other asset classes, which can help reduce overall portfolio risk.
- Ability to Identify Emerging Trends: Small-cap funds often invest in companies that are innovative and have the potential to disrupt industries. By investing in these funds, investors can gain exposure to emerging trends and technologies that may not be prevalent in larger companies.
- Potential for Outperformance: Small-cap stocks have the potential to outperform large-cap stocks over the long term. Since these companies are less widely followed by analysts and investors, there may be opportunities for skilled fund managers to uncover undervalued gems.
- Flexibility and Agility: Small-cap companies are often more nimble and able to adapt quickly to changing market conditions. This agility can translate into faster growth and greater potential for capital appreciation.
- Long-Term Growth Potential: Investing in small-cap funds can be suitable for investors with a long-term investment horizon. While small-cap stocks may be more volatile in the short term, they have the potential to deliver significant returns over time as they grow and mature.
Also read: Definition, What are Growth Mutual Funds, Features, and Benefits?
Top Small Cap Mutual Funds for 2024
In 2024, consider investing in the following top small-cap mutual funds:
| Fund name | AUM (Rs cr) | Category |
|---|---|---|
| Nippon India Small Cap Fund | Rs 45,894 Cr | Equity |
| Tata Small Cap Fund Direct-Growth | Rs 6,125 cr | Equity |
| HDFC Small Cap Fund | Rs 28,607 Crs | Equity |
| Axis Small Cap Fund Direct Growth | Rs 19,530cr | Equity |
| SBI Small Cap Fund Direct-Growth | Rs 24,681cr | Equity |
| UTI Small Cap Fund Direct Growth | Rs 3,736cr | Equity |
| Edelweiss Mid Cap Fund | Rs 4,915 Cr | Equity |
| Kotak Small Cap Fund | Rs 14,426 Cr | Equity |
Also Read: Best SIP To Invest Mutual Funds In 2024 India
How to Invest in Small Cap Mutual Funds?
Investing in small-cap mutual funds involves several steps:
- Research: Understand your investment goals, risk tolerance, and time horizon. Research different equity funds to find ones that align with your objectives.
- Choose a Fund: Select a fund based on factors like historical performance, fund manager expertise, expense ratio, and investment strategy.
- Open an Account: Open a mutual fund account with a registered fund house or through a reputable online platform such as Zerodha, Angle One, groww, Upstox, etc.
- KYC Compliance: Complete the Know Your Customer (KYC) process by providing required documents like identity proof, address proof, and PAN card.
- Investment Amount: Decide the amount you want to invest and choose the investment mode (lump sum or SIP).
- Place Order: Fill out the application form provided by the fund house or online platform, specifying the amount and mode of investment.
- Payment: Make payment for your investment through online banking, NEFT/RTGS, or cheque payment, as per the instructions provided.
- Confirmation: Once the payment is processed, you’ll receive a confirmation of your investment along with a statement of account.
- Monitor: Regularly monitor the performance of your investment and make adjustments as needed based on changing market conditions or your investment goals.
Also Read: Type and Benefits of Equity Funds: Invest In Equity Funds in 2024
Taxation on Mutual funds
If you sell your investment after holding it for more than one year, you’ll be subject to long-term capital gains tax. Currently, the tax rate is 10% if your total long-term capital gains exceed Rs. 1 lakh. If you sell your investment before one year from the purchase date, you’ll be subject to short-term capital gains tax, with the current tax rate being 15%.
FAQs:
What is small cap mutual funds?
Small-cap mutual funds are investment vehicles that primarily invest in stocks of small-cap companies. These companies typically have a market capitalization below a certain threshold, making them smaller and potentially more volatile than larger companies.
How many years should I invest in small-cap mutual funds?
The ideal investment horizon for small-cap mutual funds is typically long-term, spanning at least 5 to 10 years or more. This timeframe allows for potential market fluctuations to smooth out and provides ample opportunity for the smaller companies in the fund’s portfolio to grow and generate returns, maximizing the benefits of investing in this asset class.
Is small-cap MF risky?
Yes, small-cap mutual funds can be risky. They tend to be more volatile than large-cap funds due to their smaller size and higher sensitivity to market fluctuations.
Which cap is best for SIP?
For SIPs, a blend of large-cap, mid-cap, and small-cap funds can provide diversification and balance. Large-cap funds offer stability, mid-cap funds offer growth potential, and small-cap funds offer high growth opportunities. It’s advisable to allocate SIP investments across different market capitalizations based on risk tolerance and investment goals.
How do I choose a small-cap fund?
To choose a small-cap fund, consider factors such as fund performance, expense ratio, investment strategy, fund manager experience, and risk level. Research multiple funds, review their prospectuses, and assess how they align with your investment goals.
Is small-cap fund good or bad?
Small-cap funds can be both good and bad depending on various factors. They offer potential for high growth due to the volatility of small companies but also carry higher risk. Investors with a long-term horizon and risk tolerance may find them beneficial, while others seeking stability may prefer larger-cap funds.
Is HDFC blue chip fund good?
HDFC Blue Chip Fund is well-regarded for its consistent performance and investment in established, financially stable companies. However, its suitability depends on individual investment objectives, risk tolerance, and market conditions. Investors should conduct thorough research or consult a financial advisor before investing.
Is small-cap good for SIP?
Investing in small-cap funds through SIPs can be beneficial for long-term investors. SIPs help average out the cost of investments over time, reducing the impact of market volatility. However, it’s important to have a higher risk tolerance and a long-term investment horizon when investing in small-cap funds through SIPs.
What is blue chip fund?
A blue chip fund is a type of mutual fund that primarily invests in well-established, financially stable, and reputable companies with a history of consistent performance. These companies are typically market leaders in their respective industries, characterized by strong fundamentals, reliable earnings, and a track record of delivering value to shareholders over time.
Which small-cap fund is best in India?
Determining the “best” small-cap fund in India depends on various factors such as performance, risk appetite, investment goals, and market conditions. Some top-performing 5 years small-cap funds in India as of now include :
- Nippon India Small Cap Fund,
- HDFC Small Cap Fund,
- SBI Small Cap Fund,
- UTI Small Cap Fund Direct Growth,
- Axis Small Cap Fund, and
- Kotak Small Cap Fund.
Investors should research and consult financial advisors to select the most suitable fund for their needs.
Read More:
- Hybrid Funds: Invest In Hybrid Mutual Funds In 2024
- How to Earn from Mutual Funds, Great earning opportunity?
Final Thought
Navigating the realm of small-cap mutual funds requires a discerning approach that considers various factors such as performance history, fund management expertise, portfolio composition, and expense ratio. By adhering to stringent selection criteria, we have identified a curated selection of the best small-cap mutual funds for investment in 2024, offering investors the opportunity to capitalize on the growth potential of small-cap stocks while effectively managing risk.
Disclaimer: “We have crafted this article purely to offer insights and information. It’s important to note that we are not offering investment recommendations. Therefore, we strongly advise consulting with a qualified financial advisor before making any investment decisions.”
